The new rules of pricing

Recently, I’m told, several GCs and senior lawyers of large law firms gathered in London for a high-level conversation about new billing mechanisms. One noteworthy observation to emerge from the meeting was the law firms’ insistence that whatever new mechanism was developed, it had to take into account chargeable time invested in the work. I wasn’t there to see the clients’ reaction, but if a few eyes were rolled, it wouldn’t surprise me.

Lawyers are going nowhere in this new marketplace unless they can lose this obsession with the effort-based valuation of work. At the heart of lawyers’ billable-hour infatuation, even beyond the attraction of low-risk pricing and the enablement of perfectionism, lies the basic belief that the harder you work, the more you should get paid. “It took me ten hours to do this, so I should be paid twice what another task took five hours to do.” The nature of the work, its relative simplicity or complexity, the knowledge resources it did or didn’t require, and the value or relative lack thereof to the client — all these variables are considered incidental to the effort exerted, the expenditure of the lawyer’s precious time, to accomplish the work.

Very few marketplaces, however, base price directly on effort and time.  Avatar cost 20 times what The Hurt Locker cost to make and took years longer to complete, yet my ticket to watch either Oscar contender costs the same. One real estate agent might make ten times more effort at finding the right buyers for a home than another, yet they both get the same commission upon sale. I can go to a global craft show and buy a beautiful hand-made shawl that an aged, arthritic, Guatemalan woman spent a painful three days to create for less than a family dinner at the local pizza joint will cost that same night. Price differences can emerge from expertise, or from quality, or from brand assurance, or from customer value — but they don’t emerge from how hard someone had to work to make something.

Clients truly don’t care what it costs lawyers, in time and effort, to do their jobs. All they care about is the price, and the aptness of any price is ultimately judged by the purchaser against the value that the purchase delivers. Price is what the buyer will pay; cost is the resource drain on the seller to make the product or service. Lawyers conflate the two and base their price on their costs in time and effort. Clients are saying: your time and your effort are not relevant to the value of your service to me. What the current unprecedented drive towards fixed fees for legal work really signifies is a marketplace slowly but steadily shifting from supplier-based pricing to customer-based pricing.

Lawyers are having a very difficult time with this, for three reasons. One, as stated, is the realization that their time and effort has little market value. A second is the subsequent realization that they now need to understand and control their own internal costs to a degree never before required, and at many law firms, that’s a nightmare scenario. But the third reason is likely the hardest of all to accept, a traumatizing underlying premise to the whole conversation: the value of lawyers’ work isn’t really for lawyers to decide. Ultimately, the price of a lawyer’s services is not something a lawyer can control — and loss of control is not something most lawyers can abide.

A lawyer without a client or a file has no marketplace value — that value exists only once the lawyer is engaged on a task brought forward by the client, delivered to the client and paid for by the client. Given that fact, it’s neither surprising nor unnatural that price should be determined by the client as well. A lawyer can exert a great deal of influence on her price if she possesses extraordinary skills or experiences, and perhaps if her talents are so scarce and in great demand, she really can name her price. But 98% of lawyers are not in this position. And the days when they can dictate their price unilaterally, and base that price on their level of exertion, are ending.

That’s why the legal profession is struggling — it’s trying to come to grips with an entirely new pricing paradigm. It’s going to take a long time, and many lawyers won’t grasp the reality of the new environment until it’s too late. The longer a lawyer holds on to the idea that time and effort translates into value in the legal marketplace, the greater the chances that he or she will be one of them.


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